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The Green Sheet Online Edition

January 25, 2010 • Issue 10:01:02

Book Review
Preventing the inside job

In Insidious, authors Shirley Inscoe, Director of Financial Services Solutions for fraud management firm Memento Inc., and BC Krishna, Memento's founder and Chief Executive Officer, identify a number of problems posed by employee fraud in the banking industry. Many of these problems do not arise with outsider fraud.

One of the prickliest among them relates to what one source calls "the bad breath of banking," which is the potential awkwardness of monitoring and confronting one's own employees. It's easy to go after an outside fraudster with everything you've got, but among people with whom you've developed a personal relationship, how should suspicions be addressed?

The "bad breath" quote comes from a source identified only as "Deep Vault" (the name is a play on Deep Throat, the source who helped break the infamous Watergate Scandal). Deep Vault is one of several banking insiders interviewed for the book.

Good employees turned fraudsters

According to the authors, fraudsters can be divided into two basic categories: "Bad from the beginning and good employees gone bad." Regarding the latter category, an x-factor is the handling of money. In the banking sector, where vast quantities of money flow through and between the hands of employees every day, that money can be a particularly strong catalyst for turning hitherto law-abiding people into criminals.

These "good employees gone bad" are, not surprisingly, the most insidious of fraudsters, their crimes sometimes nearly impossible to foresee. Many commit crimes impulsively and on a dime, stealing money in a tight spot without having planned to do so.

"In general, employee fraud doesn't happen because banks are hiring criminals," the authors wrote.

"They're hiring people. Then when people are confronted by the potentially seductive combination of opp-ortunity and motivation, they can become fraudsters - not all of them, of course, just a small but damaging subset."

The second half of the book is devoted to methods of employee fraud prevention, which the authors claim should be addressed at every employee rank - from entry level hires to executives. The problem is complicated by increasingly good technology that allows money to be wired and laundered quickly and effortlessly. But that same technology can be used to combat fraud, as fraudsters invariably leave what the authors call "digital bread crumbs."

Tools in the fraud fight

Inscoe and Krishna also identify two crucial tools in the fraud fight: one is data; the other is experts - namely, analysts and investigators capable both of identifying trends indicating fraud and, where fraud exists, of rooting out the problem diplomatically. Regarding the job of spotting fraud, the authors suggest comparing employee behavior to established models and looking for anomalies.

Other prevention strategies mentioned include making sure more than one employee is present whenever a significant volume of money is handled and developing a flexible prevention strategy that evolves in synch with the fraud it's combating.

Such flexibility in fraud prevention calls to mind the ongoing effort to combat fraud in the payments industry where fraudsters targeting card data are evolving at a rate that fraud prevention techniques are struggling to catch up with.

Indeed, when "bad breath" mutates, simply being willing to confront the problem isn't always enough. Yet, regarding the potential for theft among one's own employees, it is a necessary starting point. end of article

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